September 16, 2013

Address the three weak categories that often affect board performance

Boards of Directors, like people, have areas of strengths and weaknesses. In a recent New York Times article, Gretchen Morgenson discusses the weak categories of performance in the boards of public companies.
How do nonprofit boards score in these three major categories?1. Risk Management

I think that most persons associated with nonprofit boards will agree that nonprofit boards are risk adverse. The rationale is that their budgets are derived from public or donated dollars. However, do boards occasionally seek grants that can enable them to ask outside sources (individuals or foundations) to assist with these more risky projects? For example, I recently encountered a nonprofit that has an internally developed product that could have some modest profitable commercial value. It will require a small financial investment that might be derived from an individual or foundation, and a volunteer to champion the product marketing. In my opinion, nonprofit boards need to seek these types of ventures in the current tight budget environment.

Few nonprofit boards have ad hoc or standing risk committees or even employ occasional risk management advisers. Each board should have a good understanding of the risks that it faces. Then where appropriate, purchase insurance to reduce the risk liabilities.2. CEO Succession Planning

FPs are not noted for CEO succession planning, as noted by JC Penney’s lack of planning when the board had to terminate its former president, Ron Johnson. Similarly, NFP boards are not noted for prowess in this arena. For example, a Google search of “CEO Succession Planning for Nonprofits” did not yield a single reference.
The Morgenson article cited above reports, “Hiring an outside C.E.O. costs between three and five times the amount it does to promote an existing manager.” For nonprofit organizations under budget stress, this fact can be a positive or negative factor in hiring. Positively it can force some organizations to consider all strong internal candidates. Negatively, it may allow the additional costs of engaging an outside candidate to overshadow the review of candidates. Consequently the organization may engage an internal person with less management potential.
Also, within six months of hiring a new CEO a nonprofit should have a succession plan in place in the event that the CEO is temporarily incapacitated.3. Pay for Short-Term Performance? Many nonprofits review executive compensation annually. But the impact of NFP programs and efforts may not be known for longer periods of time. Would it be desirable to structure some CEOs a deferred compensation plan dependent on measuring long-term impact? Would such a change provide more executive motivation in a nonprofit setting?
Measuring qualitative impacts also are important, but require using imperfect metrics over time to obtain a robust picture. Change is difficult for nonprofits. But in the 21st century, some tangible experimentation should take place to consider these options.

Eugene Fram is the author of “Policy vs. Paper Clips: How Using the Corporate Models Makes a Nonprofit Board More Efficient & Effective.” This post first ran on his website, Nonprofit Management.